This excerpt taken from the NDAQ 10-Q filed May 8, 2009.
Adoption of FSP APB 14-1
On January 1, 2009, we adopted FSP APB 14-1 which is applicable to our 2.50% convertible senior notes since the settlement structure of the notes permit settlement in cash upon conversion. FSP APB 14-1 requires us to separately account for the liability and equity components of the convertible debt in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 requires bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt as part of interest expense being reflected in the income statement. FSP APB 14-1 requires retrospective application to all periods presented. See FASB Staff Position APB No. 14-1, of Note 3, Recent Accounting Pronouncements, for the incremental effects of adopting FSP APB 14-1.
The unamortized discount on the convertible debt as of March 31, 2009 was $67 million and is included in debt obligations in the Condensed Consolidated Balance Sheets. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013. Interest expense recognized in the Condensed Consolidated Statements of Income for the three months ended March 31, 2009 was $7 million and is comprised of $4 million of accretion of debt discount and $3 million of contractual interest. The effective annual interest rate on the 2.50% convertible notes for the three months ended March 31, 2009 was 6.53% which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%.
As of March 31, 2009, the equity component of the convertible debt included in additional paid-in capital in the Condensed Consolidated Balance Sheets was $49 million. This amount is calculated as follows: $81 million of excess principal of the convertible debt over the carrying amount less $32 million of deferred taxes. The deferred tax liability is determined by multiplying the $81 million of excess principal of the convertible debt over the carrying amount by the U.S. marginal tax rate of 39.55%.